IT mega deals of over $100 million hit a historic low in September quarter

The value of $100-million-plus mega deals in annual contract value (ACV), which historically made up more than 20% of the total managed services ACV for IT and business services sector, declined to 10% in the July-September quarter (Q3) of calendar year 2022, impacting Indian and global IT companies, according to technology research firm ISG.

As per a note from ISG, there were three mega awards with a total ACV of $705 million in Q3CY22. This is the lowest number of mega awards in the sector since 2017. Rather, the most significant year-to-date growth in the sector has been driven by an increase in the number of smaller transactions ranging from $5 to $19 million in ACV. Meanwhile, mega deals continue to remain flat.

This comes at a time when the Indian IT sector has started to experience a slowdown in growth due to macroeconomic uncertainty, inflation, and a looming recession in the US, all of which are influencing client spending in the sector.

However, from January to September, there were 18 mega deals reported, with an ACV totalling $2.7 billion. This contrasts with 13 awards totalling $2.5 billion in ACV during the same period last year.

“As we discussed last year, enterprises are favouring smaller, shorter engagements. There are a lot of reasons for this: companies need to realize the results of outsourcing faster, and they need to reduce transformation risk,” the note said.

It added, “Companies also are increasingly carving out and rebidding less successful components of larger transactions. And, given the explosive growth of cloud, there are fewer technology assets – like servers and software licenses – included in awards than in the past.”

Ashutosh Sharma, head of research at Forrester Research India said, “We too are observing a similar trend in terms of deal wins. The biggest concern is the economic uncertainty that is plaguing Europe and North America. Over the last few days we have seen that situation resolve a little bit, but during Q3 and most parts of Q4 we had the same issue as the companies weren’t certain of where exactly the economy is headed. Consequently, they were avoiding discretionary spends while delaying some of the deals to conserve cash.”

“I expect a similar trend to play out in the Q4CY22 quarter as well. It was only in the last couple of weeks that things have started to look up,” Sharma added.

“The technology cycle is unpredictable and with uncertainty, clients want to invest in areas that can visibly give better results. As we discussed in the past, earlier larger outsourcing contracts used to be part of a large infra-kind of deal involving lot of managed services around servers, storage, managing private data centers, etc. By adopting more SaaS, those requirements are going away,” explained Mrinal Rai, principal analyst at ISG.

ISG also mentioned that the deal sizes reflect changes in buyer behaviour more than in size of providers. Small deals will continue to grow while mega deals remain flat. Also, even though every service provider tries to persuade client companies towards consolidation and its benefits, the competition remains tough as there are hundreds of IT services providers competing for the same work.

“So consolidation, when it happens, does not really move the needle,” it said.

Growth hiccups

The cracks of an impending slowdown from the IT sector's hypergrowth of the last two years have recently started to reflect in company commentary. HCLTech and Accenture both reduced their revenue growth guidance in December.

During HCLTech's investor day earlier this month, CEO C Vijayakumar said that the company's revenue is likely to come in the lower ends of its guidance band of 13.5-14.5% in constant currency terms due to higher-than-expected furloughs and challenges in the BFSI and Hi-tech segments.

Accenture reported its Q1 performance (which follows the September-August fiscal year) last week and added that the next quarter's guidance will be in the range of $15.20 billion to $15.75 billion, which was slightly lower than analysts' estimates.

Accenture maintained that the impact of foreign exchange on results will be -5% for the fiscal year 2023 overall, compared to the previous estimate of -6%. Accenture's performance trend typically provides an indication of Indian IT companies' performance for the upcoming quarter, as the company employs a large number of Indians locally.